6/21/2011 @ 12:00PM

Obama Didn't Save Union Jobs, He Saved Union Pay

Contrary to popular belief, bankruptcy does not mean companies close their doors and send employees home. This is the false message President Barack Obama tried to sell on his victory tour of Detroit. If General Motors had gone through a normal bankruptcy without taxpayer bailouts, there would still be GM jobs–maybe even more than there are now. We do not know because that was the road not taken.

We do know, however, what happened to the airlines that went through bankruptcy. Their planes kept flying, and pilots, mechanics and flight attendants reported to work, even if there were fewer of them.

Over the past decade, no industry has had worse breaks than the airlines. They took a huge hit from 9/11. They have been buffeted by fuel prices. The TSA’s intrusive airport screening angered passengers. Furthermore, the airline industry is cyclical; it suffers disproportionately from economic downturns.

Compared to the airlines, GM has had a cake walk.

Indeed, four major airlines filed for Chapter 11 bankruptcy after 9/11 (US Air and United in 2002; Northwest and Delta in 2005). Each company was restructured by a bankruptcy court according to the rule of law. In each case, creditors took haircuts and employees lost jobs and agreed to concessions in wages and work conditions. Each airline emerged from bankruptcy and continued to operate as a going concern.

There were no federal bailouts of any note. Planes continued to fly. Pilots, mechanics and flight attendants continued to have jobs, albeit there were fewer of them and their pay was less.

The four airlines had 204,000 employees on the dates they filed bankruptcy. They had 164,000 on the dates they emerged from bankruptcy. By this measure, bankruptcy cost airline employees some 20% of their jobs. The costs of bankruptcy were borne by employees, creditors and other stakeholders. It did not cost taxpayers.

On the date GM filed its taxpayer-funded bankruptcy, it had 92,000 employees. After bankruptcy it shrunk to 77,000, for a 16% loss of jobs. The GM job loss was only four percentage points lower than the airlines, which were in much worse shape. My guess is that a regular bankruptcy would have yielded about the same number of continuing jobs at GM as the taxpayer-funded bankruptcy.

The White House estimates an eventual $14 billion price tag for the GM and Chrysler bailouts. What has the $14 billion bought us? It certainly hasn’t saved millions of jobs–more like 4,000, and probably fewer. If we dig deeper, we find that most of the taxpayer money went to protecting members of the United Auto Workers.

Chapter 11 bankruptcy restructures insolvent companies with the aim of allowing them to emerge as viable concerns. It corrects past errors and is a vital link that makes market capitalism work. If we now have the federal government rather than an impartial bankruptcy judge leading this process, capitalism has lost.

Government intervention is a terrible precedent because it fosters corruption and political favoritism. It allows the current government to reward contributors to its political campaigns and, perhaps more significantly, to scare others into costly political activities. All of this lowers the productivity of the economy and makes all of us poorer. If GM becomes the precedent, we are headed toward third world status and a loss of rule of law.